Russia’s interest in accessing the Asian gas market

A recent briefing paper from Chatham House thoroughly
examines natural gas security issues in northeast Asia. The
authors assert that northeast Asia will become a major market
for gas in the coming decade, led by China, which plans to
quadruple its gas demand by 2030. Their conclusion is that
closer collaboration between Russian and Chinese national oil
companies and a gas importers union between China, Japan and
South Korea would support an equitable pipeline deal and lay
the foundation for regional energy security.

For Russia, Chinas escalating gas demand presents an
unparalleled new market opportunity for its Far Eastern gas
production. Russias energy strategy aims at sending 20%
of its natural gas exports to the Asia-Pacific market by 2030.
As of 2012, the only gas exported eastward came from the 9.6
MMtpy of Sakhalin liquefied natural gas (LNG), mainly destined
for Japan.

For Russia to achieve large-scale gas export to Asia, it
needs to start developing the super-giant onshore gas fields in
East Siberia without delay. But to do this requires securing a
market of sufficient size to justify the infrastructure
costs.

China is an essential part of the picture but the Russian
government is keen to avoid being locked into a relationship
with it as the single dominant customer. Russia has therefore
pursued a number of LNG and pipeline options that could expand
trade with other Asia-Pacific Economic Cooperation (APEC)
countries as well as penetrate the Chinese market. Fig.
1 shows the various sources of Russian gas earmarked
for Asian markets and transit routes under consideration. It
also illustrates the four main gas supply sources for
Russias gas exports to Asia: Sakhalin Island, the Sakha
Republic (chiefly the Chayanda field), the Irkutsk region
(chiefly the Kovykta field) and West Siberia. The earliest
production date that Gazprom has projected for the onshore Siberian
fields is 2016, but 20172018 currently looks more
realistic. On Sakhalin Island, only the Sakhalin II project is producing LNG. The
Sakhalin I project and Sakhalin III projects Kirinskoye block and
Yuzhno- Kirinskoye block are in preparation for production but
require more exploration.

Fig.
1. Russias Far East gas program.

Russias Far East program aims to combine two trunk
pipelinesSakhalin-Khabarovsk-Vladivostok and Sakha
Republic (Chayandagas)-Khabarovsk-Vladivostokto bring
more gas eastward. Gazprom plans to export 10 MMtpy of LNG from
Vladivostokchiefly to Japanby 2020, with the
potential to send more to South Korea, China and beyond.

Gazprom is also under significant political pressure to
develop East Siberia and Russias Far East. Immediately
after the presidential election in March 2012, President
Vladimir Putin urged the company not to ignore the exploration
and development of gas resources there. He said that Russia
should try to gain a significant share of the global LNG
market, focusing first on supplies to promising Asian markets.
Gazprom then announced that it would draw up an investment
study for Vladivostok LNG in the first quarter of 2013, stating
that it considers 20172020 the most favorable
period for targeting Asia.

But there is clearly tension between the political priority
and the commercial logic. In late October, Putin urged Gazprom
Chief Executive Officer Alexei Miller to ensure that work on
the trunk gas pipeline from the Chayanda field in the Sakha
Republic to Vladivostok began as quickly as
possible.

The questions for Russia are how much gas will be able to be
marketed as LNG, given that the price may not be competitive
enough for Chinas subsidized domestic market, and what
volume of sales can be secured through pipeline contracts.

Sino-Russian gas cooperation

In 2006, Russia agreed in principle to supply China with 68
Bcm of its gas over 30 years. However, negotiations between the
two parties for a deal to establish the necessary pipelines
have been frustrated by disagreements on the linked issues of
price and whether to prioritize a western pipeline into
Xinjiang or an eastern pipeline into northeastern China.

National development and geopolitical aspirations underpin
the position of each party. China wants Russian gas primarily
to supply its northeastern provinces of Heilongjiang, Jilin and
Liaoning.

Russia favors prioritizing the Altai route from its West
Siberian gas fields to western China, which would enable
Gazprom to divert its surplus European volume to China. This would
effectively make Russia a swing supplier, increasing its
ability to use gas as a political bargaining tool with
countries such as Ukraine. Gazprom has tried to gain access to
Chinas West-East Pipeline (WEP) corridor through a joint
investment proposal in the past, but to no avail.

For Russia, Chinas three northeastern provinces offer
only a 20-Bcm/y gas market, whereas at least 30 Bcm/y would be
needed to justify the development of an eastern pipeline. While
Gazprom announced in September 2010 that a legally binding
agreement had been reached with CNPC, setting out the
commercial parameters for deliveries through the western route,
no agreement on the border benchmark price for Russian gas
deliveries has been reached to date. HP

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